On July 22, the D.C. Circuit, a court that has previously vacated SEC rules for inadequate cost-benefit analysis, issued its harshest criticism yet of the agency when it vacated the proxy access rule for failure to consider the rule's effect upon efficiency, competition and capital formation. The opinion is only 10 pages long, and Judge Ginsburg devotes himself to heaping criticism and scorn on the agency's failure to consider adequately its economic effects. Business Roundtable v. SEC (D.C. Cir. July 22, 2011). To paraphrase just a snippet of the opinion: the agency "inconsistently and opportunistically" framed the costs and benefits; failed adequately to quantify certain costs or to explain why those costs could not be quantified; neglected to support its predictive judgments; contradicted itself and failed to respond to substantial problems raised by commenters, etc. You get the drift of the opinion.

What's next for proxy access? The SEC has not previously sought an en banc hearing or certiorari in those instances where the D.C. Circuit vacated rules, so that option seems unlikely. It could, as with the previous efforts (variable annuity contracts and investment company boards with majority of independent directors), simply give up. Activist shareholder groups, however, fought hard for proxy access and are not likely to give up the fight. The agency can go back to the drawing board and attempt to develop a record on cost-benefit analysis that will satisfy the D.C. Circuit, but that will be a difficult, time-consuming task, given the numerosity of the court's criticisms, which has made it clear that it will not give the agency any benefit of the doubt. (Jay Brown has demonstrated that this is inconsistent with the APA's arbitrary and capricious standard.) Alternatively, the SEC might consider adopting a weaker version to encourage, but not mandate, proxy access that might pass muster with the business community and the D.C. Circuit.

In any event, morale must be low today at the SEC, as this is yet another black mark on Mary Schapiro's administration.